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Copy of Bill Gates' testimony in Microsoft antitrust case

Bill Gates is testifying today in the Microsoft antitrust case. Here's the
five-page executive summary:
http://www.politechbot.com/docs/gates.testimony.summary.042202.pdf
Here's the 163-page full version (1.1 MB):
http://www.politechbot.com/docs/gates.testimony.042202.pdf
I've included some excerpts below. Even if you believe that Microsoft
should pay a price beyond what the Justice Department extracted in the
settlement, it's hardly obvious that the litigating states' proposal is a
good one. Their plan (which they hope the judge will approve) smacks of
something written by competitors out to advance their private interests,
not the public interest. The unintended consequences (or, cynically, the
intended ones) seem to be legion. See below.
Previous Politech message:
http://www.politechbot.com/p-03417.html
-Declan
---
10. As explained in Section III, the NSPR would undermine the
Windows platform, to the detriment of all who benefit from it, in many
different ways. In
fact, the NSPR would hobble Microsoft as a competitor and innovator across
many product
categories because many of its provisions are broadly worded to apply to
any Microsoft
product, service, feature or technology.
11. Aside from these concerns, it would be extremely difficult, if not
impossible in some cases, for Microsoft to comply with the NSPR. Many key
aspects of
the NSPR, particularly its definitions relating to "middleware," are vague
and ambiguous,
providing Microsoft with no clear statement of its obligations. Other
aspects of the NSPR
simply could not be feasibly implemented. Many provisions of the NSPR lead
to extreme
results, but Microsoft would not have the freedom to construe the NSPR in
ways that we
find less extreme. Microsoft is committed to complying fully with Court
orders, including
any remedy that may be ordered in this case. We can do that only if the
remedy is clear as
written and its terms feasible.
We recognized that to make the Altair and other microprocessorbased
devices useful, they were going to need software. I left college, and Paul
and I
founded a company to develop great microprocessor software, which we called
Microsoft.
It was not much of a business in its early years, just Paul, me and a small
group of
developers we hired banging out code day and night in spartan offices in
Albuquerque,
New Mexico. But it was a labor of love.
In short, if the Windows platform were to fragment, the primary
value it provides—the ability to provide compatibility across a wide range
of software and
hardware—would be lost. Windows would no longer offer an efficient platform
to ISVs
because Windows would not consist of any single platform on which ISVs
could rely in
developing applications. (See Demonstrative Exhibit 1.)
70. As software programs became more costly to develop and offered
fewer new innovations, consumers would have less incentive to buy new PCs.
The same
"positive feedback loop" that propelled the PC industry to years' of steady
growth would
work in reverse, causing the industry to stagnate as products became more
expensive to
develop even as they provided fewer benefits and less interoperability.
Over the years, Microsoft has worked to ensure that products from a
variety of companies work well together. Indeed, I believe that Microsoft
has done more to
promote interoperability among computer products than any other company in
history.
In the software industry, some information
about competitors' products is available, and other information is
protected by IP laws. If
Microsoft's competitors were permitted to implement many of Microsoft's
innovations in
their own products without regard to Microsoft IP rights, Microsoft would
have little it
could uniquely offer the marketplace. No firm can do unique R&D in the
software industry
absent significant IP protection for its work.
There are three key aspects of the NSPR—the breadth of the covered
product categories, the vagueness and ambiguity of many of its most
important provisions,
and the feasibility of complying with various of its requirements—that are
especially
alarming to me. I believe that these aspects of the NSPR would make it
extremely difficult
for Microsoft to understand the requirements of the NSPR, to comply fully
with the
requirements it does understand, and to continue to deliver new
technologies to the
marketplace. In short, the practical effect of the NSPR would be to cripple
Microsoft as a
technology company.
Section 8 provides another important example of ambiguity in the
NSPR, made worse by the very broad scope of the provision. Do the
non-settling States
really mean that Microsoft should not take any action that directly or
indirectly adversely
affects any third party based on the fact that the third party is competing
with Microsoft in
any product category? That would seem to rule out ordinary business practices.
61
Given the tightly integrated design of Windows and the complexity of the
product, Microsoft cannot ensure that "the binary code for each Microsoft
Middleware
Product" could be removed without degrading the rest of the operating
system. To the
contrary, removing the binary code for "Microsoft Middleware Products" will
degrade the
rest of the operating system—every function that depends upon the removed
software will
fail.
Indeed, Microsoft would face an immediate crisis if the NSRP were
entered because Section 1 would prohibit Microsoft from distributing any
Windows
Operating System Product after six months that does not comply with the
requirements of
that section (unless an extension could be obtained from the Court). We
could not comply
with Section 1 in six months for the following six reasons.
231. Wholly apart from the many problems identified above, the pricing
provisions of Section 1 would create a disincentive to developing improved
versions of
Windows. Rather than earn a return on our substantial investment in
improving Windows,
any improvements could result in a revenue loss to Microsoft. In fact,
under the pricing
formula set forth in Section 1, the price of Windows could be zero. That
pricing regime
also could not feasibly be implemented, for the reasons set forth below.
At a minimum, every OEM would have a strong incentive to
"remove" the "Browser" software from Windows, earn the price reduction that
would flow
from our roughly $100 million in annual development costs for that software
(very roughly,
15% of the cost of developing a desktop version of Windows), then add back
a free version
of the exact same "Browser" software made available under the compulsory,
royalty-free
source code licenses for Internet Explorer provided under Section 12. Over
the ten year life
of the NSPR, OEMs' perfectly rational decision to swap out then add back
identical
"Browser" code would result in revenue loss to Microsoft of roughly $10
billion. Under
such a pricing scheme, why would any rational business enterprise in
Microsoft's position
continue to invest in Web browser innovation, whether as part of Windows or
separately
from Windows?
272. Over the long-term, modifications to Windows by individual OEMs
acting in their short-term self interest would present a classic tragedy of
the commons
problem. Just as a lake that is fished too heavily soon will support no
one, the PC
ecosystem as a whole will suffer if the stability and consistency of
Windows is not
maintained, for the reasons I discussed above. When PCs become less
reliable because the
quality of Windows has been compromised, when consumers must undergo
retraining to
operate different brands of PCs because of differences in their user
interfaces, when
applications written for one version of Windows will not run on another
version, the entire
PC ecosystem will suffer.
Free Access to Microsoft Source Code. Like most other commercial
software vendors, Microsoft generally seeks to limit access to its source
code. Source code
reveals product innovations. For example, a competitor who is free to
review Microsoft's
source code (as Section 4.c permits under the misleading heading
"Compliance") will see
the architecture, data structures, algorithms and other key aspects of the
relevant Microsoft
product. That will make it much easier to copy Microsoft's innovations,
which is why
commercial software vendors generally do not provide source code to rivals.
324. Third, Section 4 would make it hard for Microsoft to develop new
versions of Windows—especially when read in conjunction with Section 5.
Creating a
new version of Windows to improve performance and fix bugs requires writing
a lot of new
code, which eliminates many internal interfaces and changes others. Under
Section 4,
however, such interfaces would have been disclosed, and third party
software developers
may have relied on them. If Microsoft changes the interfaces, software
programs that rely
on them will no longer operate properly, which would make Windows less
appealing as a
platform and trigger potential violations of Section 5.
116
341. Here are just a few examples of beneficial business contracts that
apparently would be banned by Section 6.a.:
· Microsoft's online service, MSN, provides co-marketing money
to a retailer to promote the MSN service on "end caps" on store
shelves. The retailer is "restricted" from promoting competing
online services on end caps—that is the placement for which
Microsoft is paying.
· Retailers may promote Microsoft's game console with
advertisements stating that a hot new game is available "only on
Xbox." Microsoft's agreement with the game ISV "restricts" the
ISV from offering its game for a period of time on competing
game consoles.
· To improve its home publishing software, Microsoft may obtain
rights from a third party to include a collection of "clip art" in the
next version of Microsoft's publishing product. The agreement
"restricts" the third party from offering the same clip art
collection for use in a competing publishing product for a period
of time.
· Microsoft and an ISV jointly develop new technology. The joint
venture agreement "restricts" the ISV for a period of time from
developing competing technology.
355. Section 8 could be read to ban Microsoft from competing in any
product category. I know such a ban would not be reasonable, and yet that
is what the
language of Section 8 appears to provide for.
356. It states that Microsoft may not take (or threaten) any action that
directly or indirectly adversely affects anyone based directly or
indirectly, in whole or in
part, on any actual or contemplated use, distribution, promotion, support,
development,
etc. of any non-Microsoft product, service, feature or technology (not
limited to
middleware). Under this broad provision, nearly any act of competition
could be seen as an
adverse act. Competing means attempting to maximize sales, which often
entails taking
sales from a rival (adversely affecting them). At the very least, Microsoft
would have no
comfort that routine business acts would not violate Section 8.
399. Section 12 would also require Microsoft to provide AOL (and the
rest of the industry) with the source code for MSN Explorer 6.0 and its
successors. MSN
Explorer 6.0 is innovative software that makes it easy and enjoyable to use
Microsoft's
MSN family of Web sites (links are available via www.msn.com). [...]
401. Reducing Microsoft's incentive to innovate would reduce
competition in Web browsing software. Why would AOL continue development of
its own
Web browsing software if Microsoft's technology were available free of
charge, with rights
to all improvements (assuming Microsoft made any) for the next ten years?
428. The availability of a reasonably good, low-priced version of Office
running on non-Microsoft operating systems would severely hurt Microsoft's
operating
system business by putting it at a very big price disadvantage. For all the
R&D that
Microsoft puts into its operating system technology, the economics of the
business are such
that we generate revenue of only about $70 per Windows unit. We generate
revenue of
roughly $150 to $275 for each user of Office. (As is customary in the
software industry,
royalty rates for Office vary considerably by version, volume licensed, and
channel of
distribution.) That means that a computer user that wanted to run a version
of Office would
have to consider if he or she was willing to pay an additional $150 to
$275—as much as
three times the price of Windows itself—in order to do so on Microsoft's
version of
Windows. Microsoft could not simply reduce the price of Office to match or
beat the price
of the non-Microsoft Office version because we would generate insufficient
revenue to
support new R&D on the product.
433. In addition to requiring Microsoft to auction off its Office technology
to three bidders, Section 14 would require Microsoft to continue to invest,
for ten years, in
developing new versions of Office for the Apple's Mac OS, with "features
consistent with
Microsoft Office for Windows." Section 14 would obligate Microsoft to
invest its
resources in this way without regard to the economic or technical viability
of doing so.
434. For example, if the Apple Macintosh platform were to lose share in
the future—a possibility that cannot be ruled out given Apple's "near
death" experience in
the mid-1990s—it would be economically inefficient for Microsoft to
continue to invest in
building applications for the platform. Other changes in business
circumstances, such as a
decision by Apple to focus on customer segments that generate little demand
for business
productivity software, might also render it economically unviable to
continue to build new
versions of Office for the Mac. A lot can happen over ten years.
150
450. Microsoft has a strong track record both in supporting industry
standards in its software and in contributing to the development of
industry standards.
Microsoft's products provide state-of-the-art support for dozens of
important standards,
enabling developers to make use of them in their products with little
effort. In the area of
Internet standards alone, we provide excellent implementations of TCP/IP,
HTTP, FTP,
HTML, XML, SOAP, UDDI, WSDL, PPP, POP3, SMTP, PPTP, LDAP, TELNET and
others. (See Appendix A.) Our implementation of these standards in Windows
promotes
interoperability between Windows and non-Microsoft software, both platforms and
applications.
456. Third, Section 16 would require Microsoft to "fully" implement
standards even before they have been finalized and adopted by a
Standard-Setting body.
Yet before finalization, standards are in flux, with various proponents of
the standard
debating the virtues of one approach or another.
457. Fourth, Section 16 would require that Microsoft "fully" implement a
"Standard" when (i) it is merely under consideration by a Standard-Setting
Body, (ii) once
it is adopted, and (iii) as "modified from time to time." Nothing in
Section 16 grants
Microsoft time to develop new implementations to meet changing
specifications for a
standard and nothing states which products must comply with the standard.
458. Fifth, Section 16 fails to distinguish between bona fide standardsetting
bodies, such as the Internet Engineering Task Force or the World Wide Web
Consortium, and ad hoc groups associated with particular companies or
industry alliances,
such as the Java Community Process (which Section 22.kk explicitly includes
in the
definition of "Standard-Setting Body"). The Java Community Process is a
group organized
by Sun to obtain feedback on Sun's proprietary Java technology and promote that
technology. Sun retains veto control. It is not a true industry
Standard-Setting Body.
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